"Private Consumption Recovery Slower Than Expected Amid COVID Rebound"

Even with easing of social distancing and economic activity restrictions,
private consumption recovery likely slow without fundamental solutions like COVID-19 vaccine development

[Asia Economy Reporter Kim Eunbyeol] The recovery speed of private consumption is expected to remain slow due to the resurgence and prolonged duration of the novel coronavirus infection (COVID-19). Although consumption somewhat recovered in the second quarter thanks to government policies such as emergency disaster relief payments and reductions in individual consumption tax, it is anticipated that the recovery pace will slow down following the COVID-19 resurgence.

The Bank of Korea stated in its "Monetary and Credit Policy Report" released on the 10th, "Recently, due to the domestic resurgence of COVID-19, the recovery of private consumption is likely to proceed more slowly than expected. If concerns about the prolonged COVID-19 situation persist, face-to-face service consumption will continue to contract, delaying improvements in employment and income conditions, and making it difficult for consumer sentiment to recover quickly."

According to the report, private consumption sharply declined by 6.5% quarter-on-quarter in the first quarter due to the impact of COVID-19, then slightly increased by 1.5% in the second quarter due to effects from government disaster relief payments and other measures. However, the recovery patterns differed between goods and service consumption. Durable goods consumption rose by 18.3%, but service consumption continued to decline at -0.7%.

Goods consumption rebounded sharply in the second quarter due to government support measures. By type of goods (based on retail sales), durable goods such as passenger cars increased significantly due to reductions in individual consumption tax and new car launches, while computers and furniture also grew considerably due to the expansion of online education and remote work. In contrast, service consumption recovered more gradually compared to goods consumption. By sector (based on service industry production), consumption in accommodation and food services, arts, sports and leisure, and transportation and warehousing services sharply declined after COVID-19 but rebounded, yet still remained significantly below the same period last year.

Lee Sang-hyung, Director of the Monetary Policy Department at the Bank of Korea, said, "If the spread of COVID-19 prolongs, factors such as continued sluggishness in face-to-face service consumption, delayed improvements in employment and income conditions, and uncertainties related to expanded substitute consumption may act as constraints on the future recovery of private consumption." He added, "As concerns about the resurgence of COVID-19 continue, the tendency to avoid face-to-face services is expected to persist for the time being."

The Bank of Korea forecasts that even if restrictions on economic activities such as social distancing are eased, it will be difficult for conditions to improve significantly until health safety is proven through the development of vaccines and treatments.

The prolonged contraction of face-to-face activities may also act as a factor limiting improvements in employment and income conditions. The Bank of Korea expects that accommodation and food services, education, arts, and sports have higher employment inducement effects compared to other industries, so employment shocks may be relatively large. If automation and unmanned operations accelerate in the future to minimize face-to-face contact and reduce labor costs, existing jobs may be further reduced.

There is also concern that employment and income shocks caused by COVID-19 may concentrate on vulnerable groups such as low-wage service workers, temporary day laborers, and small-scale self-employed individuals, and if improvements are delayed, it could prolong the overall consumption slump in the economy. The director said, "The COVID-19 pandemic may reduce corporate labor demand for low-skilled workers, which could act as a factor restricting income condition improvements for vulnerable groups."

Furthermore, he added, "The extent to which reductions in spending on face-to-face services and overseas travel are substituted by other goods and services may also affect the future recovery of private consumption. Although demand for non-face-to-face services such as online games is increasing and online purchases are rapidly expanding, in the short term, delays in improving consumer sentiment are expected to limit the overall consumption recovery."

This content was produced with the assistance of AI translation services.